The Fed’s rethink on rates

As people meander down the path called life, most are encountered with choices.

Making decisions becomes increasingly important as the stakes become higher, especially when one is talking about the subject of money.

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The widely anticipated June jobs report came out with a better-than-expected number, some 287,000 jobs were created vs. the market consensus of 175,000.

Investors and policymakers now have to analyze economic conditions, both domestically and globally, to make informed decisions about how to proceed for the rest of the year.

Fed Calculations

At the Federal Reserve Board, the strong jobs number has to be considered in the context of previous results. How does it fit into the moving average over the past six or 12 months?

In this regard, the average of job growth is relatively weak versus the past few years. And if you look at the three-month trend, jobs growth is averaging about 140,000.

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In my opinion, the Fed’s probable policy path will be the status quo with the hope job growth improves towards the 200,000 level as the year winds down.

If this is the case, higher interest rates can be part of the consideration in my view.

Bad Choices

For bond investors, the choice between a 10-year Treasury bond of 1.39% or the negative yields in Japan and Germany isn’t a great one.

If you are an equity investor, you face environment of ultra-low interest rates, a sluggish economy and solid consumer spending.

Banks hope interest rates may yet go higher, and energy companies can feel encouraged by the strong chance the dollar will remain weak. You only have to look at how gold and silver have rocketed higher since Brexit to see metals are finding love because of a profound distaste of central banking policy and a distrust of fiat currencies.

Brexit Impact

The currency volatility of the pound, which fell to a touch below $1.30 versus the dollar at one point in June, has placed the Bank of England on notice to stay vigilant and keep the UK economy out of recession.

In Europe, there are worries about banks’ exposure to sovereign bonds and poor loans.

In my opinion, markets are now going to pivot earnings reports across the corporate landscape in coming weeks.

Earnings Outlook

Expectations are not real high, which for investors is a good thing. In my opinion, much attention will go to banks and energy to see how strong the commodity bounce has helped these industries.

Retail remains hated, so any signs of a pulse would be helpful there as well. Housing, autos, quick-service restaurants and real estate seem to be in pretty good shape in my view.

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